The auditor of YES Bank has pointed out multiple breaches of the Reserve Bank of India’s (RBI’s) norms and loan covenants by the private bank in the financial year ended March 2020, warning that these may impact the bank’s ability to continue as a going concern.
The auditor, BSR & Co, also said that as the fate of the bank’s additional tier-1 (AT-1) bonds remained uncertain — as the matter is pending in court — any adverse judgment would affect it adversely.
The bank has breached the regulatory requirements of the RBI regarding maintaining the minimum common equity tier-1 (CET-1) and tier-1 capital ratios, which indicates the position of capital adequacy of a bank. “The breach is primarily on account of the increase in the provision for advances during the year ended March 31, 2020, as the bank has decided, on a prudent basis, to enhance its provision coverage ratio on its non-performing asset (NPA) loans over and above minimum RBI loan level provisioning,” the auditor’s report said.
It said the bank had incurred a loss of Rs 16,418 crores for the year ended March 31, 2020. During the last six months of fiscal 2020, there has also been a significant decline in the bank's deposit base, an increase in its non-performing assets or bad loan ratios, resulting in breach of loan covenants on its foreign currency debt and credit rating downgrades, it said. This resulted in partial prepayment of foreign currency debt linked to external credit rating.
“The bank has breached minimum statutory liquidity ratio (SLR) and liquidity coverage ratio requirements of the RBI during the year and has provided an amount of Rs 334 crores for the expected penalty on the SLR breach,” said the report.
The bank’s former director Uttam Prakash Agarwal was first to point out the sharp fall in bank’s financials, lack of corporate governance norms and the loss of deposits to the RBI in January this year, but Yes Bank’s then management had rubbished Agarwal’s letter, saying he had to leave the board as he was not meeting the RBI’s “fit and proper” norms for directors.
The auditor said the write-back of the AT-1 bonds on March 14, 2020, also resulted in the breach of tier-1 capital ratio as of March 31 this year.
“The CET-1 ratio and the tier-1 capital ratio for the bank as of March 31 stood at 6.3 per cent and 6.5 per cent as compared to the minimum requirements of 7.375 per cent and 8.875 per cent, respectively,” the auditor said, adding the bank would have to take more steps to augment its capital base in the year 2020-21. There is uncertainty around RBI’s potential action for such a breach, the report said.
“We are unable to comment on the consequential impact of the above regulatory breach on these standalone financial results,” the report said and pointed out that YES Bank’s reconstruction scheme does not contain any reference to the write-back of the AT-1 securities. “Based on the legal advice on the contractual terms of the AT-1 bonds, the bank has fully written back AT-1 bonds aggregating to Rs 8,415 crores on 14 March 2020. This action by the bank has been legally challenged through a writ petition in the Bombay High court,” it said.
Several investors of the bank’s AT-1 bonds moved the court as the government scheme had left them high and dry though they were promised that their interest will be taken off.
The auditor said the bank had made an additional provision of Rs 15,422 crore for the period ended December 31, 2019 on a prudent evaluation of the status of NPAs based on discussion with regulator over and above the RBI norms relating to the minimum provision to be made by banks on their loans and advances.